Implementing the Chosen Risk Management Techniques

T u t o r i a l s f o r

I N S 21

E x a m i n a t i o n

Implementation of the chosen technique requires that risk manager make decisions concerning:

· What should be done

· Who should be responsible

· How to communicate risk management information

· How to allocate the costs of the program

Deciding What Should Be Done

Once the selection of technique is over, the risk manager must workout the details of how to implement them.

Deciding Who Should Be Responsible

Managing Loss Exposures: Risk Management

Examining Risk Management Techniques

Risk Management Techniques

Technique	What the Technique Does	Example
Avoidance	Eliminates the chance of a particular type of loss by either disposing of an existing loss exposure or by not assuming a new exposure	A family decides not to purchase a boat and therefore avoids the property and liability loss exposures associated with boat ownership.
Loss Control 1. Loss prevention 2. Loss reduction	Lowers frequency and/or severity of losses Lowers loss frequency (number of losses) Lowers loss severity (dollar amount of losses)	A business installs a burglar alarm system in attempt to prevent burglaries. A business installs a sprinkler system to reduce the amount of fire damage from potential fires.
Retention	Retains all or part of a loss exposure (intentionally or unintentionally) which means that losses must be paid for with available funds or other assets	A business decides not to purchase collision coverage for its fleet of vehicles and sets aside its own funds to pay for possible collision losses.
Noninsurance transfer	Transfers potential financial consequences of a loss exposure from one party to another party that is not an insurance company	In a lease, a landlord transfers the liability exposures of a rented building to the tenant.
Insurance	Transfers financial consequences of specified losses from one party (the insured) to an insurance company in exchange for a specified fee (premium).	A family purchases homeowners and personal auto policies from an insurance company.

Decisions Based on Financial Criteria

Financial management standards typically call for making those choices that promise to increase profits and/or operating efficiency.

Decisions Based on Informal Guidelines

Do not retain more than you can afford to lose.

Do not retain large exposures to save a little premium.

Do not spend a lot of money for a little protection.

Do not consider insurance for a substitute of loss control.

Managing Loss Exposures: Risk Management

Identifying and Analyzing Loss Exposures

Identifying Loss Exposures

To handle loss exposures, a risk manager must first identify them. Identifying Loss Exposures involves developing a complete list of loss exposures and possible accidental losses that can affect a particular household or organization.

The risk manager can start with a physical inspection of the premises and then use other tools that aid in the identification process, such as loss exposure surveys and flow charts.

Physical Inspection

The most straight forward method of identifying loss exposure is a physical inspection of all locations, operations, maintenance routines, safety practices, work processes and other activities.

Loss Exposure Survey

A loss exposure survey is a risk management tool in the form of a checklist or questionnaire listing potential loss exposures that a household or an organization might face.

A loss exposure survey can be a valuable tool to help the risk manager identify the organization’s loss exposures.

The survey’s major weakness is that it might omit an important exposure, especially if the organization has unique operations not included on a standard survey form. Hence, the survey must be used as a guide to develop a comprehensive picture of the organization’s operations and loss exposures.

Flowchart

A flowchart is a diagram that depicts the flow of a particular operation or set of related operations within an organization.

Risk managers can use a flow chart to identify specific types of loss exposures. A flowchart complements the loss exposure survey by providing a diagram of loss exposures from certain operations. Also it forces the risk manager to examine each and every aspect of the operation in detail.

Analyzing Loss Exposures

Analyzing loss exposures involves determining the financial effect of a potential loss on the household or organization. To determine the financial effect of losses, a risk manager needs to measure both the likely frequency and the severity of the loss.

Loss Frequency

Loss frequency is a term used to indicate how often losses occur or are expected to occur. Loss frequency is used to predict the likelihood of similar losses in the future.

Frequent losses include abrasions and minor lacerations of employees at a manufacturing plant, minor auto accidents with a large fleet of autos, and spoilage of produce at a supermarket. Other losses such as those caused by earthquakes, tornadoes, and hurricanes, occur much less frequently.

Accurate measurement of loss frequency is important because the proper treatment of the loss exposure often depends on how frequently the loss is expected to occur.

Loss Severity

Loss severity is a term that refers to the dollar amount of damages that results or might result from loss exposures. Loss severity is used to predict how costly future losses are likely to be.

Properly estimating loss severity is essential in order to treat the exposure to loss. This also enables on adopting of type of risk management technique.

Most property loss has a finite value and hence it is easy to estimate loss severity of a property loss than a liability loss.

Managing Loss Exposures: Risk Management

Managing Loss Exposures: Risk Management

Risk Management is the process of making and implementing decisions to deal with loss exposures. It involves identifying loss exposures and then applying various techniques to eliminate, control, finance, or transfer those exposures.

Steps involved in Risk Management Process

1. Identifying and analyzing loss exposures

Identifying	Analyzing
Physical inspection Loss exposure survey Flowchart	Loss frequency Loss severity

2. Examining risk management techniques

Avoidance Loss control: Loss prevention Loss reduction Retention Noninsurance transfer Insurance

3. Selecting the most appropriate techniques

Decisions based on financial criteria Decisions based on informal guidelines: Do not retain more than you can afford to lose. Do not retain large exposures to save a little premium. Do not spend a lot of money for a little protection. Do not consider insurance for a substitute of loss control.

4. Implementing the chosen techniques

Decide what should be done. Decide who should be responsible. Communicate risk management information. Allocate costs of the risk management program.

5. Monitoring and modifying the risk management program

Continuously monitor the risk management program. Periodically review the insurance program. Revise the risk management program as needed.

Managing Loss Exposures: Risk Management

What Factors Affect the Amount of Claim Payments?

The extent of the insurer’s payment depends on the following types of policy provisions:

· Policy limits

· Defense Cost provisions

· “Other insurance” provisions

Policy limits

Limits are expressed in different ways, as follows:

· An each person limit is the maximum amount an insurer will pay for injury to any one person for a covered loss.

· An each occurrence limit is the maximum amount an insurer will pay for all covered losses from a single occurrence, regardless of the number of persons injured or the number of parties claiming property damage.

· An aggregate limit is the maximum amount an insurer will pay for all covered losses during the covered policy period.

Split Limits and Single Limits

Split limits are separate limits that an insurer will pay for bodily injury and for property damage.

A single limit of liability is the maximum amount an insurer will pay for the insured’s liability for both bodily injury and property damage that arise from a single occurrence.

Defense Cost Provisions

Most liability policies do not place any limit as to Defense Cost. The only limitation is that insurer is not obligated to pay once the entire policy limit has been paid in settlement.

On the other hand, defense costs are usually payable in addition to the policy limits and policy limits include only payment for damages.

There are certain policies which states that defense costs should be within the overall policy limit.

“Other Insurance” Provisions

In cases, where more than one insurance policy exists covering the same property, “Other Insurance” provision in a policy will prevent insured from profiting out of a claim from all the policies covering the property.

Liability Loss Exposures and Policy Provisions

Defense Costs and Expenses

These costs include not only the fees paid to lawyers but also all the other expenses associated with defending a liability claim. Such expenses can include investigation expenses, expert witness fees, the premiums for necessary bonds, and other expenses incurred to prepare for and conduct a trial.

The insurer is obligated to defend an insured only when the claimant alleges that injury or damage caused by a covered activity of the insured.

The expenses incurred for the defense, known, as Litigation Expenses are the expenses incurred for legal defense, such as attorneys’ fees, expert witness fees, and the cost of legal research.

Supplementary Payments

In liability policies, supplementary payments are amounts the insurer agrees to pay (in addition to the liability limits) for items such as premiums on bail bonds and appeal bonds, loss of the insured’s earnings because of attendance at trials, and other reasonable expenses incurred by the insured at the insurer’s request.

In other words, these supplementary payments consist of the following: -

· All expenses incurred by the insurer

· The cost (up to a specified limit) of bail bonds or other required bonds

· Expenses incurred by the insured at the insurer’s request

· The insured’s loss of earnings (up to a specified amount per day) because of attendance at hearing or trials at the insurer’s request.

Prejudgment Interest

Prejudgment Interest is interest that might accrue on damages before a judgment has been rendered.

Postjudgment Interest

Postjudgment Interest is interest that might accrue on damages after a judgment has been entered in a court and before the money is paid.

Medical Payments

Medical payments coverage pays necessary medical expenses incurred within a specified period by a claimant (and in certain policies, by an insured) for a covered injury, regardless of whether the insured was at fault.

What Time Period is Covered?

Personal auto insurance is usually written for a six-month term. Other types of liability insurance are usually written for a one-year period, though other policy terms are also possible.

A liability insurance policy states what must happen during the policy period in order to “trigger” coverage. Depending on the type of policy, coverage is usually triggered by either:

· Events that occur during the policy period (in an occurrence basis policy)

· Claims made (submitted) during the policy period (in a claims – made policy)

Occurrence Basis Coverage

Occurrence basis coverage covers liability claims that occur during the policy period, regardless of when the claim is submitted to the insurer.

Occurrence policies do not limit the time period during which a claim can be submitted. As long as the injury or damage occurs during the policy period, coverage applies even to claims made years later.

Claims-Made Coverage

Claims-made coverage liability claims that made (submitted) during the policy period for covered events that occur on or after the retroactive date and before the end of the policy period.

A retroactive date in a claims-made policy is the date on or after which injury or damage must occur in order to be recovered.

The situation becomes more complicated in practice, however. Claims due to injuries that occur before that retroactive date are not covered even if the claim is made during the policy period. Occurrence policies also do not cover claims arising from occurrences before the policy’s inception date.

Because of period renewals and the possibility that the insured will shift coverage from insurer to another, maintaining continuous coverage without gaps is perhaps the greatest difficulty with claims-made coverage.

Liability Loss Exposures and Policy Provisions

Damages

A person who has suffered bodily injury, property damage, or personal injury for which the insured is allegedly responsible might make a claim for damages. The claim is often settled out of court, and the insurer pays the claimant on behalf of the insured.

However, Legal liability might involve following type of damages: -

· Compensatory Damage

· Punitive Damage

Compensatory Damage includes both special and general damages that are intended to compensate a victim for harm actually suffered.

Special Damages Specific, out of pocket expenses are known as special damages. In case of bodily injury claims these damages usually include hospital expenses, Doctor and miscellaneous medical expenses, ambulance charges, prescriptions and loss to wages for the time spent away from the job during recovery.

General Damages are compensatory damages awarded for losses such pain and suffering, that do not have a specific economic value.

Punitive Damages are damages awarded by a court to punish wrong doers who, through malicious or outrageous actions, cause injury damage to others.

Most liability insurance policies do not specifically state whether punitive damages, intended to punish the insured for some outrageous conduct, are covered. There are certain State Laws that prohibit insurance coverage for punitive damages.

Liability Loss Exposures and Policy Provisions

Liability Insurance Policy Provisions

Liability Insurance covers losses resulting from bodily injury to others or damage to the property of others for which the insured is legally liable and to which the coverage applies.

Liability insurance differs from property insurance in several ways: -

· Property insurance claims usually involve only two parties – the insurer and the insured. Liability insurance involve three parties; the insurer, the insured and a third party – the claimant who brings a legal complaint against the insured for injury or damage allegedly caused by the insured. Although the claimant is not a party to the insurance contract, he or she is a party to the claim settlement.

· In property insurance, insurers pay claims to an insured when covered property is damaged by a covered cause of loss during the period. In liability insurance, on the other hand, insurer pays a third party on behalf of an insured against whom a claim has been made, provided the claim is covered by the policy.

· Property insurance policies must clarify which property and causes of loss the policy covers. In contrast, liability insurance policies must indicate the activities and types of injury or damage that are covered.

In order to clarify the intent of the insuring agreement, the provisions of a liability insurance policy must answer the following questions:

· What parties are insured?

· What activities are covered?

· What types of injury or damage are covered?

· What costs are covered?

· What time period is covered?

· What factors affect the amount of claim payments?

What Parties are Insured?

The extent of liability coverage provided to parties other than the named insured is determined by their relationship to the named insured as well as by circumstances.

For example, the liability coverage of a typical homeowners policy applies to:

· The named insured and the named insured’s spouse, if the spouse is a resident in the household.

· Relatives of the named insured or spouse, if the relatives reside in the household

· Children in the care of the named insured or spouse

· Any person or organization legally responsible for animals or watercraft owned by an insured (except in business situations)

· Employees using a covered vehicle, such as a lawn tractor, and other people using a covered vehicle on an insured location with the named insured’s consent.

Commercial liability policies, apart from the named insured, also cover: -

· Employees of the named insured

· Real estate managers for the name insured

· Persons responsible for the property of a named insured who has died

· Any person who operates mobile equipment owned by the named insured while on a public highway

· Any organization that is newly acquired or formed by the named insured for up to a certain number of days after it is formed or acquired.

What Activities Are Covered?

Certain policies state the specific activity or source of liability covered.

In contrast, general liability insurance covers all activities or sources of liability that are not specifically excluded. In addition to excluding coverage for losses best handled elsewhere, general liability insurance policies contain exclusions dealing with uninsurable exposures, preventable losses, and exposures that would be too costly to insure.

What Types of Injury or Damage Are Covered?

Bodily Injury

Bodily injury is any physical injury to a person, including sickness, disease and death.

A typical commercial general liability policy defines bodily injury as follows: -

“Bodily injury” means bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.

Given the above definition, the commercial general liability policy clarifies that it covers claims for injury, sickness, disease and death.

Property Damage

Property Damage is physical injury to, destruction of, or loss of use of tangible property.

Commercial general liability policy defines property damage as follows: -

“Property damage” means:

a. Physical injury to tangible property, including all resulting loss of use that property; or

b. Loss of use of tangible property that is not physically injured.

Under homeowner’s policy, the same is defined as follows: -

“Property damage” means physical injury to, destruction of, or loss of use of tangible property.

Hence the above definitions make it clear that property damage includes both direct losses and time element (or indirect) losses.

Personal Injury

In insurance, the term personal injury is generally used to mean injury, other than bodily injury, arising from intentional torts such as libel, slander, or invasion of privacy.

For insurance purposes, intentional torts are usually considered personal injury offenses and are either excluded from coverage or are specifically covered as a separate coverage.

A few policies define personal injury in a way that includes even bodily injury apart from the offenses listed above.

However, the more common interpretation allows for separate coverage for bodily injury and personal injury, in which case personal injury coverage supplements bodily injury coverage. For example, the commercial general liability policy automatically includes personal injury coverage under a separate insuring agreement. Coverage for personal injury liability can be added by endorsement to a homeowners policy.

Advertising Injury

Advertising injury typically includes the following types of offenses:

· Libel and slander

· Publication of material that constitutes an invasion of privacy

· Misappropriation of advertising ideas or business style

· Infringement of copyright, title, or slogan

The definitions of personal injury offenses and advertising injury offenses overlap somewhat. But this does not result in duplicate coverage. Furthermore, the policy clarifies that personal injury does not include offenses involving advertising activities and that advertising injury refers only to offenses committed in the course of advertising activities.

What Costs Are Covered?

Liability insurance policies typically cover two types of costs:

· The damage that the insured is legally liable to pay

· The cost of defending the insured against the claim

Some policies also cover other costs, such as supplementary payments and medical payments.

Liability Loss Exposures and Policy Provisions

Potential Financial Consequences of Liability Loss Exposures

A person must sustain some definite harm for a liability loss to result in a valid claim. To those who can show that actual harm or injury was suffered, the court may award damages in addition to the reimbursement of defense costs.

Damage refer to a monetary award that one party is required to pay to another who has suffered loss or injury for which first party is legally liable.

Legal liability might involve following type of damages: -

· Compensatory Damage

· Punitive Damage

Compensatory Damage includes both special and general damages that are intended to compensate a victim for harm actually suffered.

Special Damages Specific, out of pocket expenses are known as special damages. In case of bodily injury claims these damages usually include hospital expenses, Doctor and miscellaneous medical expenses, ambulance charges, prescriptions and loss to wages for the time spent away from the job during recovery.

General Damages are compensatory damages awarded for losses such pain and suffering, that do not have a specific economic value.

Punitive Damages are damages awarded by a court to punish wrong doers who, through malicious or outrageous actions, cause injury damage to others.

Defense Costs

These costs include not only the fees paid to lawyers but also all the other expenses associated with defending a liability claim. Such expenses can include investigation expenses, expert witness fees, the premiums for necessary bonds, and other expenses incurred to prepare for and conduct a trial.

Activities and Situations Leading to Liability Loss Exposures

Although the following list is far from exhaustive, liability can arise from any of the following exposures: -

· Automobiles and other conveyances – Accidents that result in bodily injury, death or property damage of another party.

· Premises – Accidental fall of a third party at the residence or business premises.

· Business operations – Products of the organization should be defect free and must solve the purpose otherwise leading to liability due to malfunction.

· Completed operations – Faulty workman ship can always lead to a liability claim.

· Products – Manufacture of hazardous products, usage of hazardous raw materials, hazardous waste arising out of manufacturing process, etc., are typical examples.

· Advertising – Proper permission should be sought and procedures need to be followed before releasing an advertisement of a product otherwise it may result in liability claim.

· Pollution – Many types of products pollute the environment when they are discarded. In addition, the manufacture of some products creates contaminants that, if not disposed of properly, cause environmental impairment or pollution.

· Liquor – Intoxicated persons threaten themselves as well as others. Providers of alcohol can be responsible for customers or guests who become intoxicated and injure someone while drunk.

· Professional activities – Attorneys, physicians, architects, engineers and other professionals are considered experts in their field and are expected to perform accordingly. Errors and Omissions (E &O) are negligent acts (errors) or failures to act (omissions) committed by a profession in the conduct of business that give rise to legal liability for damages.

Liability Loss Exposures and Policy Provisions

TORT

A tort is a wrongful act, other than a crime or breach of contract, committed by one party against another.

Tort law is the branch of civil law that deals with civil wrongs other than breaches of contract. The central concern of tort law is determining responsibility for injury or damage.

Under tort law, an individual or organization can face a claim for legal liability on the basis any of the following: -

· Negligence

· Intentional torts

· Absolute torts

Types of Torts

Negligence (Failure to act in a prudent manner)	Intentional Torts (Deliberate acts that cause harm)	Absolute Liability (Inherently dangerous activities)
Elements: Duty owed to another Breach of that duty Injury or damage Unbroken chain of events from breach of duty to injury or damage	Examples: Assault Battery Libel Slander False arrest Invasion of privacy	Examples: Owning a wild animal Blasting operations

Negligence

Negligence is failure to act in a manner that is reasonably prudent. Negligence occurs when a person or organization fails to exercise the appropriate degree of care under given circumstances.

A liability judgment based on negligence depends on the following four elements: -

· A duty owed to another. The first element of negligence is that a person or organization must have a duty to act (or not to act) that constitutes a responsibility to another party.

· A breach of that duty. In order for a person or an organization to be held negligent, a breach of the duty owed to another party must occur. A breach of duty is failure to exercise a reasonable degree of care expected in a particular situation.

· Injury or damage. The third element of negligence requires that the claimant must suffer definite injury or harm. No recovery can be made unless there is injury or harm.

· Unbroken chain of events between the breach of duty and the injury or damage. A finding of negligence also requires that the breach of duty initiate an unbroken chain of events leading to the injury. The breach of the duty must be the proximate cause of the injury.

A tortfeasor is a person, a business, or another party who has committed a tort.

Vicarious liability is legal responsibility that occurs when one party is held liable for the actions of another party. For example, parents might be found vicariously liable for the actions of their minor children.

Intentional Torts

An intentional tort is a deliberate act (other than a breach of contract) that causes harm to another person. Intentional torts include: -

· Assault – the intentional threat of bodily harm

· Battery – the unlawful physical contact with another person

· Libel – a written or printed untrue statement that damages a person’s reputation

· Slander – an oral untrue statement that damages a person’s reputation

· False arrest – an unlawful physical restraint of another’s freedom

· Invasion of privacy – an encroachment on another person’s right to be left alone

Absolute Liability

Absolute liability (sometimes called strict liability) is legal liability that arises from inherently dangerous activities or dangerously defective products that result in injury or harm to another, regardless of how much care was used in the activity. Absolute liability does not require proof of negligence. (“Strict liability” is also used to describe the liability imposed by certain statutes, such as workers compensation laws).

For example, Blasting operations present an exposure to liability for business organizations.

Contracts

A contract is a legally enforceable agreement between two or more parties. Contract law enables an injured party to seek recovery because another party has breached a duty voluntarily accepted in a contract. In such a case, it is the specific contract, rather than law in general, that the court interprets.

Two areas of contract law important to insurance are liability assumed under a contract and breach of warranty.

Liability Assumed Under Contract

Parties to a contract sometimes find it convenient for one party to assume the financial consequences of certain types of liability faced by the other. The party assuming liability might be closer to the scene, exercise more control over operations, or have the ability to respond to claims more efficiently.

A hold harmless agreement is a contractual provision that obligates one party to assume the legal liability of another party. This provision requires that one party to “hold harmless and indemnify” the other party against liability arising from the activity (or product) that is specified in the contract.

Breach of Warranty

Warranties are promises, either written or implied, such as a promise by a seller to a buyer that a product is fit for a particular purpose.

The law of contracts also governs claims arising from breach of warranty. Contracts for sales of goods include warranties, or promises made by the seller. The law also implies certain warranties. The buyer in such contracts does not have to prove negligence on the part of the seller. The fact that the product does not work shows that the contract was not fulfilled.

Statutes

Statutory liability is legal liability imposed by a specific statute or law. Statutory liability exists because of specific statues. Although common law may cover a particular situation, statutory law may extend, restrict, or clarify the rights of injured parties in that situation or similar ones. One reason for such legislation is the attempt to ensure adequate compensation for injuries without lengthy disputes over who is at fault. Prominent examples of this kind of statutory liability involve no-fault auto laws and workers compensation laws.

No-Fault Auto Laws

In an effort to reduce the number of lawsuits resulting from auto accidents, some states have enacted “no-fault” laws. These laws recognize the inevitability of auto accidents and restrict or eliminate the right to sue the other party in an accident, except serious cases defined by the law. Victims with less serious injuries collect their out-of-pocket expenses from their own insurance companies without the need for expensive legal proceedings.

Workers Compensation Laws

Such a statute eliminates an employee’s right to sue the employer for most work-related injuries and also imposes on the employer automatic (strict) liability to pay specified benefits.

In place of the common law principle of negligence, workers compensation laws create a system in which injured employees receive benefits specified in these laws. As long as the injury is work-related, the employer pays the specified benefits regardless of who is at fault.

Liability Loss Exposures and Policy Provisions

Criminal Law Versus Civil Law

Criminal law is the category of law that applies to wrongful acts that society deems so harmful to the public welfare that government takes the responsibility for prosecuting and punishing the wrongdoers.

Crimes are punishable by fines, imprisonment, or, in some states, even death.

Civil Law is the category of law that deals with the rights and responsibilities of citizens with respect to one another. Civil law applies to legal matters not governed by criminal law.

Civil law protects personal and property rights. If some invades the privacy or property of another person or harms another’s reputation, the insured person may seek amends in court. Thus Civil law contributes to the welfare and safety of society.

Criminal and Civil Consequences of the Same Act

Criminal and civil law do not necessarily deal with entirely different matters. A particular act can often have both criminal and civil law consequences.

Elements of a Liability Loss Exposure

A liability loss exposure involves the possibility of one party becoming legally responsible for injury or harm to another party.

This section examines the following elements of a liability loss exposure: -

· The legal basis of a claim by one party against another for damages

· The financial consequences that might occur from a liability loss

Legal Basis of a Liability Claim

For an injured property to have a right of recovery from another party, some principle of law must create a link between the two parties. This link can appear in tort law, in contract law, or in statutory law. Any law or legal principle that establishes a relationship between the two parties can be the basis for a claim of liability.

Legal Basis of a Liability Claim

A legal right of recovery Can be based on

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Torts

Contracts Statues

Negligence International Absolute Liability Assumed Breach of No-Fault Workers

Torts Liability Under Contract Warranty Auto Laws Compensation

Laws

Liability Loss Exposures and Policy Provisions

Liability Loss Exposures and Policy Provisions

A Liability Loss Exposure presents the possibility of a claim alleging legal responsibility of a person or business for injury or damage suffered by another party.

A liability loss is a claim for monetary damages because of injury to another party or damage to another party’s property.

Liability claims might result from bodily injury, property damage, libel, slander, humiliation, defamation, invasion of privacy and similar occurrences.

Legal Liability

Legal liability means that a person or organization is legally responsible, or liable, for injury or damage suffered by another person or organization.

Sources of Law

The legal system in the United States derives essentially from the following: -

· The Constitution, which is the source of constitutional law

· Legislative bodies, which is the source of statutory law

· Court decisions, which is the source of common law

Constitutional Law

Constitutional law consists of the Constitution itself and all the decisions of the Supreme Court that involve the Constitution.

Statutory Law

Statutory law consists of the formal laws, or statues enacted by federal, state, or local legislative bodies.

Common Law

Common law or case law consists of a body of principles and rules established over time by courts on case-by-case basis.

Liability Loss Exposures and Policy Provisions

Amounts of Recovery

The amount payable depends on policy provisions in the following categories: -

· Policy limits

· Valuation provisions

· Settlement options

· Deductibles

· Insurance-to-value provisions

· “Other insurance” provisions

Policy limits

When buying property insurance, the applicant usually requests a certain dollar amount of coverage. If the insurer agrees to provide that amount of coverage, the policy limit is established and the same is entered into the policy.

It is the maximum amount of money that can be recovered under a policy. It also enables insured to know whether his property is adequately covered or whether there is any under insurance.

On the other hand, it shows insurer the maximum amount he has to pay in the event of a claim under the policy. This enables insurance companies to keep a track of their operation effectiveness in a given geographical area.

For most property insurance, the premium charged is directly related to the policy limit.

Valuation Provisions

The two most common valuation approaches in property insurance policies are replacement cost and actual cash value. A third approach, used for certain types of property, involves agreed value.

Settlement Options

The insurer generally has the option of:

· Paying the value (as determined by the valuation provision) of the lost or damaged property.

· Paying the cost to repair or replace the property (if repair or replacement is possible)

· Repairing, rebuilding, or replacing the property with other property of like kind and quality.

These options for settling property losses can often reduce the insurer’s cost of settling claims without diminishing the insured’s actual indemnification.

Deductibles

A deductible is a portion of covered loss that is not paid by the insurer. The deductible is subtracted from the amount the insurer would otherwise be obligated to pay the insured.

Deductibles encourage insured to try to prevent losses. Shifting the cost of small claims to the insured also enables the insurer to reduce premiums. Handling claims for small amounts often costs more than the dollar amount of the claim. Thus, deductibles enable people to purchase coverage for serious losses at a reasonable price without unnecessarily involving the insurer in small losses.

Insurance-to-Value Provisions

These are provisions in property insurance policies that encourage insureds to purchase an amount of insurance that is equal to, or close to, the value of the covered property.

Few losses are total. Unless all insureds purchase an amount of insurance close to the full value of their property, some insureds will pay considerably less for what provides, in most cases, the same recovery for a loss.

The traditional approach to encouraging insurance to value is to include a coinsurance provision in the policy. Coinsurance is an insurance-to-value provision in many property insurance policies. If the property is underinsured, the coinsurance provision reduces the amount that an insurer will pay for a covered loss.

“Other Insurance” Provisions

In cases, where more than one insurance policy exists covering the same property, “Other Insurance” provision in a policy will prevent insured from profiting out of a claim from all the policies covering the property.

Property Loss Exposures